China’s Advantage of Backwardness

With Beijing scheduled to report new GDP numbers on Thursday, analysts are pretty uniformly predicting the data will show China’s growth continued to swoon in the third quarter, but two San Francisco Federal Reserve economists are bullish on the Chinese economy for an unusual reason: its continued backwardness.

China will slow over the coming years, but not as much as many predict, write Israel Malkin and Mark Spiegel, because of much of the country is so lightly developed that growth there will continue to speed along. “There is an advantage to backwardness, in the sense that a poorer region or nation has a lot of catching up to do before it prices itself out of certain activities,” said Mr. Spiegel, explaining his paper.

According to the two economists, growth in China’s more developed provinces may slow to 5.5% by 2020, as places like Beijing and Shanghai reach the income levels of wealthy countries. But the interior of China is far poorer than China’s showcase cities, so wages are far cheaper there, making it suitable for labor-intensive work. Those places will have an easier time continuing to register faster growth. The two expect those provinces to grow at a 7.5% pace by 2020.

Well, perhaps. China’s coastal provinces grew quickly in part because they were on the coast and had easier access to global shipping and export markets. That isn’t the case in the interior. The authors note that as a caveat to their conclusions

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